Tax implications for Americans abroad: now start thinking ahead

Ellen Wallace for Genevalunch.com writes: A woman in her sixties whom I barely know stopped me on the street a few weeks ago to say she was in a panic – her husband was threatening to divorce her because she had not filed US taxes since she was 24, when her father did it for her. And now her bank was refusing to leave her name on their accounts and a tax lawyer gave them an estimate to “come in from the cold” that had her Swiss husband fit to be tied.

A northern European friend who is not American tells me her son is considering marrying his long-time girlfriend, from the US, who grew up in Europe. She’s wondering at what point details about the family money, left to her children, would become part of the US tax system if her son has a US wife.

I’m a news junky so I find it hard to believe any American could still be unaware of his or her basic tax obligations, but for those whose ties to the US are no longer strong, it’s not unusual. I know from talking to people at ACA (American Citizens Abroad) and from people who contact me, as a writer on these problems, that the case of the woman I ran into on the street is far from rare. Her husband would now like to just get the mess sorted out and move on.

Tangling with the next generation’s US taxes

Not so easy: they have children. And those children inherited US citizenship. And they have spouses who are not American.

My friend whose son is considering getting married will have to think beyond love and romance and consider the financial implications of having an American spouse – someone from the only major country in the world that taxes its citizens no matter where they reside and what taxes they pay to other countries.

Many Americans who live in Switzerland have been tangling for the past four years with tax issues involving fines and back taxes, but as the unpleasant surprises begin to die down, it’s time to consider the future.

Discovering they had tax issues came as a nasty surprise to many Americans who paid their taxes in full in Switzerland and considered themselves law-abiding citizens.

The problems began with the enforcement of 2002 FBar legislation designed as an anti-terrorist measure but widely enforced starting only in 2009, and then new Fatca legislation that prompted Swiss banks to close accounts belonging to Americans. The woman I met on the street realized she had a problem only when her bank told her she could no longer have an account.

Some people opted to stay in the system, others gave up their US citizenship – although never saying openly it was for tax reasons, because that’s enough to annul the renunciation decision.

If the worst seems to be over, think again: Americans who live outside the US have been focusing on the past to sort out tax problems, but anyone who has children who grew up outside the States, and young people with US passports, are among those who need to think about their tax future now.

Tax messes for those you love, best avoided

Reuters has just published a commentary, “What to do when you inherit a tax mess”, with a mention of a case where a woman in the US who died left her American husband a never-declared Swiss bank account worth $5 million.

The sum sounds like a nice surprise, but the mess and very high cost to declare such an account would be unpleasant, to say the least, especially for an elderly person. Consider this: he would need to convince the IRS he never knew anything about the account.

Families where some members give up their citizenship but not others are left with inheritance complications. If you’re a US citizen and you leave money to a non-US citizen, that person can expect to pay a far higher rate of tax on the inheritance, so discussions about giving up citizenship should involve the whole family.

Jonathan Lachowitz in January 2013 published “Financial Cliff Tax Planning” for the ACA, a must-read document for Americans living overseas. Among his many points is this one:

“The US Federal Estate Tax will rise to 40% (from 35%) though surprisingly for USCitizens there is now a $5.25 million exemption and $10.5 million for married couples and this is indexed for inflation so it will continue to increase. For non US persons (e.g. Swiss citizens) owning US assets (e.g. real estate or stocks of US companies even if held at a Swiss bank) the Estate tax rate also goes up to 40% and their exemption remains at a stingy $60,000.11. The Annual Gift tax exclusion has increased for 2013 to $14,000 from $13,000.”

A word of caution: US legal advice and taxpayer assistance for Americans overseas can be very expensive. List your questions, discuss what’s involved in planning, ask for an estimate and shop around.

ACA lists books for expat Americans to help them understand their tax obligations, probably a cheaper and better starting point for most people who simply want to be compliant and plan ahead.